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Contracts
South Texas College of Law Houston
Powers, Jean Fleming

Contracts Outline

Contract – a promise or a set of promises for the breach of which a law gives a remedy, or the performance of which the law in someway recognizes as a duty”

Promising involves committing ourselves to courses of action that will often run contrary to our own interest. But, with the right to make promises, we can induce others to do things we value more than we expect to lose in making the commitment
a. we also engage in cooperative ventures, with an agreement or understanding as to how we will divide the fruits of our efforts (trust is involved)
b. law gives us an enforcement mechanism to trust each other enough

I. Menu of Possible Remedies:
1. Expectation Damages – puts you in as good a place as if contract was performed
2. Reliance Damages – compensate for damages incurred in reliance on expectation
a. do stuff because you think the other will come through
3. Restitution – takes away any benefits the breaching party had obtained from the breach
a. disgorgement of profits – RARE, don’t get this in contract law much (in Naval, came from Copyright action, not contract action)
4. Rescission – invalidates contract, so there are no duties going forward
a. not seeking damages, getting out of contract
5. Specific Performance – forces performance
a. injuctive relief
6. Nominal Damages – you win and get $1
7. Punitive Damages – don’t get this in contract law

II. Enforcement

1. in enforcing contracts, courts compensate the breach, rather than punishing breachers
a. punitive damages not recoverable in contract breach action
b. Naval v. Charter – The Hunt For Red October. Naval sought injunction based on copyright infringement and for breach because charter shipped early. Court said Expectation damages are typical damages, not Punitive damages (unless breach involves other torts such as fraudulent breach)
1. the central objective is compensatory (we don’t want a zero-sum game)
c. Expectation damages: Naval lost hardcover sales and gets THAT back (taking away profits from Berkeley=disgorgmenet)
d. But, if Berkeley had waited, $700k in sales would have ended up an economic loss.

Theories
1. Descriptive Theory of Individual Psychology: “Homo Economicus”
a. humans are preference maximizers
2. Descriptive Theory of Law (Posner)
a. legal rules, decisions are often ones that maximize efficiency
b. efficiency = state where one person improves and no one loses (Pareto Optimal/Superior)
3. Law and Economics as an ethical theory
a. Conseuentialist theories (utilitarianism) say the right act is the one that maximizes utility or human welfare
b. Deontological theories: some acts are right regardless of consequences

4. Enforcing Contract Law conduces to efficiency
a. voluntary transactions tend to satisfy preferences of all parties and their enforcement promotes efficiency
5. Efficient Breach – expectation damages satisfy preferences of one party

Two Reasons for Expectation Damages rather than Punitive/other damages
1. in the commercial context(where goods are fungible for cash), efficient breach makes sense for all
2. extra-legal sanctions (credit rating, reputation effects)
I. Exceptions: but, if not in the commercial context (where not everything is fungible for cash):
a. marriage contract – punitive damages
b. real estate contracts – specific performance (if damages are inadequate to protect the expectation interest of the injured party because they put so much into it)

c. If there are other interests at stake
1. Snepp – breach of contract with CIA not to disclose
a. here, decided that punitive damages would be
speculative and unusual
b. decided Disgorgment (via contructive trust) was good here

1. because there are public interests at stake

l right to do something, not a forebearance
2. Fiege v. Bohm – P had intercourse with D, who she said fathered a bastard child. In exchange for not starting bastardy proceedings, he was to pay. D then has test done, realizes he’s not the father, stops paying. She institutes bastardy proceedings. He sues, and she wins on Breach of contract.
a. court says she gave up legal right to sue him and even though he was not the father, there was a subjective “good faith” belief at the time (and it had an objective basis in fact and law) that the claim was valid (bona-fide)
b. This was also a Settlement Contract – and law favors private settlements of disputed claims. So hold person who promised to pay in settlement bound by the promise (Expectation damages won’t work well in this non-commercial setting, so go with Specific Performance).

UNILATERAL v. BILATERAL CONTRACTS
1. Unilateral – where one party promises à right and duty on both sides
a. ex: Hamer – uncle made promise, kid started smoking at 20 à uncle has no cause of action against nephew, so UNILATERAL
b. rare today, most contracts that seem this way usually aren’t
2. Bilateral – Where both parties promise à right on one side, duty on other
a. ex: if the nephew had said “fine, I’ll do it, give me $6000)

“Peppercorn” is NOT consideration!

general rule: can’t get around the requirement of consideration and make a gratuituous gift binding simply by stating a nominal sum

thus, courts only enforcing promises that induce others